Book profit for partners' remuneration is computed without first setting off brought forward business loss.

For computing book profit for partners' remuneration under section 40(b), the profit must be taken as the net profit shown in the profit and loss account as computed under Chapter IV-D, and brought forward business loss is not first to be set off for this purpose. On that construction, the permissible remuneration is determined before any prior-year loss adjustment, and the lower authorities erred in reducing book profit by earlier losses. The disallowance of partners' remuneration is therefore not sustainable.

---

---

Issues: Whether, for computing book profit for allowing partners' remuneration under section 40(b), brought forward business loss must be set off before allowing the remuneration.

Analysis: Explanation 3 to section 40(b) defines book profit as the net profit shown in the profit and loss account, computed in the manner laid down in Chapter IV-D. On that construction, the allowability of partners' remuneration has to be determined on the book profit as computed under the provision, and brought forward business loss is not to be adjusted first for that purpose. The lower authorities erred in applying the set-off of earlier losses before computing the permissible remuneration.

Conclusion: The issue is decided in favour of the assessee, and the disallowance of partners' remuneration is not sustainable.

---